I’m pretty sure that the fed bought both treasuries and agency debt today. That agency debt is what people are referring to as MBS’s. Note however that I believe these securities are backed by Freddie Mae and Freddie Mac. They are conforming loans and already backed by the government. I don’t believe any of the MBSs bought by the fed today are the risky MBSs backed by 2nds and other non-conforming mortgages. (In other words, no non-agency MBSs)
I believe that the fed loans money to the big banks, and takes these securities as collateral. That allows the big banks to function smoothly until things quiet down, and then the banks return the funds and get their bonds back. The hope is that this will keep the markets from going into a full panic.
This will NOT however alleviate any of the basic problems like the fact that there are lots of junk mortgages out there headed for default. (Or that housing seems to be slowly but steadily dragging the economy into recession.) I believe that this is really only a move to stop a full panic from happening. (or put another way, this will allow for an orderly unwinding of problems instead of a chaotic panic)
If one of these big banks should go bankrupt, the fed will hold the collateral loans, (treasuries and agency debt) which it can sell. If the fed can’t sell treasuries or agency debt onto the open market, then well… we’ll talk about that while we wait in the food line.
Just remember, these comments are worth exactly what you paid for them…